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The New Economy As a Decent Society

How is the new economy affecting our lives and what should be done about its excesses and injustices? This debate is emerging all over the world, but it surfaces only sporadically and partially, like the tip of a giant iceberg into which other things crash.

French workers strike in pursuit of a 35-hour maximum workweek (or in some cases, against it). German industrialists, concerned about high wages and regulations that make it hard to fire or demote employees, begin to move jobs abroad. East Asians, trampled by the stampede of global capital away from their shores several years ago, are deeply ambivalent about its return. Americans march in Seattle against the World Trade Organization.

In a national poll, a majority of Americans say they believe the global economy hurts average people and that good jobs will move overseas. Meanwhile, right-wing movements in several countries fulminate against immigrants and, occasionally, poor minorities in their midst; left-wing movements, against global elites who seem to float over and above nations while parking their money in tax havens, vacationing in idyllic spots, and living and working in urban glamour zones.

But much of the debate is misguided and much of the blame is misplaced. Most of us want the new economy's terrific deals. Almost all of us are consumers, and an expanding number of us are investors. Rapidly evolving technologies are creating a global network in which we can get exactly what we want from almost anywhere at the lowest price and highest value. We can choose widely and switch on a dime (or yuan, peso, or rupiah). In a few years, through broadband and wireless Internet connections as well as advances in molecular and genetic research, today's terrific deals will be overshadowed by even better ones. Many products and services will be cheaper, faster, more powerful. Some will enable us to live longer or to be even more entertained, invigorated, stimulated, and interconnected.

The culprit isn't out there. It's not in the global corporations, greedy executives, immigrants, poor minorities, or insensitive elites. It's in here--in our own appetites, in what we want to buy, in the great deals we crave. The benefits and the burdens of the emerging economy are two sides of the same coin. Consider:

The easier it is for us as buyers to switch to something better, the harder we have to scramble as sellers in order to keep every customer, hold every client, seize every opportunity, land every contract. As a result, our lives are more and more frenzied.

The faster the economy changes--with new innovations and opportunities that engender faster switches by customers and investors in response--the harder it is for people to be confident of what they'll earn next year or even next month, of what they will be doing, of where they will be doing it. As a result, our lives are less and less predictable.

The more intense the competition to offer better products and services, the greater the demand for people with insights and ideas about how to do so. And because the demand for such people is growing faster than the supply of them, their earnings are pushed upward. Yet the same competition is pushing downward the pay of people doing routine work that can be done faster and cheaper by hardware and software, or by workers elsewhere around the world. As a result, disparities in earnings are growing steadily larger.

Finally, the wider the choices and the easier the switches, the less difficult it is for people to link up with others who are just as wealthy, healthy, and well educated as they are--within residential communities, businesses, schools, universities, and insurance groups. And the easier it is for them to exclude the slower, poorer, sicker, less educated, or otherwise more disadvantaged, all of whom have greater needs. As a result, our society is becoming more fragmented.

What to do? The menu of choices we get to make as individual consumers or workers is shaped by the choices we make or fail to make as citizens.

At one extreme, this and any other society could embrace neo-Ludditism . We could pass laws to unplug the computers, burn the software, erect a huge tariff wall to keep out cheap foreign goods, seal our borders against inexpensive foreign labor, block flows of global capital, bar hostile takeovers, disempower shareholders, grant exceedingly long patent protections, preserve all of our jobs just as they are, freeze-frame our neighborhoods, and stop innovation in its tracks. The society we would create might be serene and stable; inequalities might be diminished; and citizens could devote themselves to quiet contemplation. But such a society would be very poor materially relative to the wealth it could otherwise generate. And it would be profoundly oppressive.

At the other extreme, we could put our foot on the accelerator and let 'er rip. We could choose the path of fastest growth, widest choice, and quickest switch. Pursued to its logical end, this would mean all of us would work in one giant global network. Each individual's income would depend on continuous spot-auction bids for his or her services. All government supports--regulations, insurance, pooled benefits--would be dismantled as the sorting mechanism became perfectly efficient worldwide.

The spectrum from exceedingly rich to exceedingly poor in every nation would exactly reflect the widest spectrum of wealth and poverty in the world. Your own position on that spectrum would depend on how hard you worked and sold yourself and on your status and connections. Some of us would overflow in material wealth, but no one would feel economically secure. And in the meantime, our society will have been pulled apart and sharply sorted to the point of no longer being a society at all.

How do we find the best position between these two extremes? Not simply by locating the midpoint between dynamism and social tranquility. We find it by allowing citizens to enjoy the advantages of the new dynamism while cushioning them against its excesses and tempering its injustices.

This is the same basic response of Progressive reformers a century ago to what was then the new industrial order. The emerging economy of that era posed enormous advantages in terms of cheaper and better products, but large-scale production came at a price. Small towns and self-contained communities gave way to large cities teeming with immigrants and the poor, to giant corporations and trusts, to widening disparities of income and wealth, and to big factories that employed thousands of wage workers. Technology expanded the demand for nimble-fingered production workers, including children--presenting a starker choice than that posed by the farmwork children had always done before. Was childhood to be preserved for learning and play, or was it to be devoted to factory production? In time the nation decided against child labor.

We also passed laws that set minimum wages and maximum hours, with time-and-a-half paid for overtime; that recognized unions and required collective bargaining; and that guarded worker health and safety through building and sanitation codes and mining regulations. And as the new industrial order exposed working Americans to new kinds of economic uncertainties, social insurance protected against injuries on the job, temporary unemployment, the untimely death of a breadwinner spouse, and inadequate retirement savings.

Reformers also understood that success within the new industrial order required education beyond eighth grade. The high school movement of the first decades of the century extended free public schooling through the 12th grade and required children's attendance until they were 16. Kindergartens were added as well.

Debate raged about how to protect the citizenry from the large industrial combinations that appeared to threaten the nation's traditions. Some feared that the giant companies would erode the moral and civic foundations of American democracy unless the combinations were broken up; others argued that a better means of keeping the advantages of large-scale enterprise while minimizing its dangers was to regulate it. The compromise was antitrust laws enforced in moderation and regulatory agencies that set rules in consultation with industry.

Our anxieties at the start of the twenty-first century are not fundamentally different from those that surfaced at the start of the industrial era. But the answers the inhabitants of that era devised for their concerns don't fit the economy and society that we are entering.

The benefits as well as the burdens of the old industrial economy turned on large-scale production. That's why reformers a century ago focused on improving the conditions of employment and constraining raw economic power. The benefits of the new economy, by contrast, turn on innovation and the increasing ease with which buyers can switch--to better, faster, and cheaper products from anywhere around the world, to higher-returning investments, and to the joint amenities that constitute the modern community. As noted, these same features of the new economy are also contributing to financial insecurity, more frenzied work, widening gaps in income and wealth, an ever more efficient sorting mechanism, and the consequent erosion of personal, family, and community life.

One way to achieve a better social balance might be through a great moral and spiritual reawakening in which people rise en masse to renounce the excesses of acquisitive individualism in the new economy. Such surges have occurred before. But moral fervor, once unleashed, is not easily contained. It seems safer to explore avenues of practical reform. Some of these will have to be pursued by government; others are more properly left to the nonprofit sector, to faith-based institutions, and to universities and social entrepreneurs.

How, then, do we gain the advantages of a new economic dynamism with minimum personal pain or social resistance? A new progressivism would involve several tasks:

Cushion people against sudden economic shocks. Full employment remains the most fundamental shock absorber. If no jobs are currently available, public-service jobs should make up the shortfall. We could also guarantee that all jobholders receive a minimally decent income. Full-time workers would be eligible for an expanded Earned Income Tax Credit, to bring their total earnings up to at least half the nation's median income.

In addition, unemployment insurance (a legacy of the industrial era, when long-term employment was the norm) could be replaced with earnings insurance, to smooth out abrupt drops in earned income. Say your earnings dip 50 percent from one year to the next. Earnings insurance would make up half the difference. If your earnings doubled from one year to the next, you'd pay half the gain into the earnings insurance fund. Such earnings insurance would help not only the poor but also middle- and upper-income people anxious about the possibility of suddenly losing their economic footing.

To further cushion against shocks, employee benefits could be made fully portable. Rather than attach health and pension benefits to particular jobs through tax-favored treatment of health and retirement benefits (another vestige of the industrial era), we could uncouple such benefits from specific jobs and attach them to people instead. The tax savings could be used to supplement the health and retirement needs of workers directly, regardless of where they worked; low-income workers would get proportionately more help. All citizens would have access to affordable health insurance.

By instituting community insurance, we could reduce sharp shocks to a particular area when businesses or financial resources suddenly departed. If a community or region were to lose more than, say, 5 percent of its economic base in the course of a year, it would automatically get funds to help smooth the transition--to retrain people for different jobs, to help providers of local services adjust, to soften the decline in property values. Such insurance could be financed by a small tax on the businesses or capital that rapidly moves into a particular community or region.

The same idea might be extended to entire nations in the form of a small "transactions tax"--say, one-tenth of 1 percent--on the value of all fast-moving global financial transactions. Not only would such a small tax throw a bit of sand in the speculative wheels of international finance, but it could also finance a stabilization fund to smooth the ups and downs of national currencies.

Trade laws could be amended to provide greater relief from sudden surges of imports by expanding the so-called escape clause under current trade treaties. Nations are presently eligible for such temporary trade protection if a domestic industry is competitively injured by the surge. But social injury should count as well. Workers and their communities should be able to petition for temporary relief when a sudden surge of imports threatens to cause substantial job dislocation and community abandonment.

Widen the circle of prosperity. Inequalities of income and wealth are wider today than they have been since the early years of industrialization in the late nineteenth and early twentieth centuries. The same trend is occurring in every modern economy. What can be done? Most of the people who have been losing out don't have an adequate education--the first prerequisite to success in the new economy. So the best investment in their future prosperity is to improve their store of "human capital."

The risk of most school voucher proposals is that the poorest children--normally those with the biggest learning or behavioral problems--would be sorted together into the least-desirable schools. One way to avoid this would be to make the size of the voucher proportional to family need. Children from the very poorest families would have the largest and most valuable vouchers, thereby making the children sufficiently attractive for good schools to want to compete for them.

Education takes considerable time. And even if children from poorer homes were learning like mad, they'd still start off their adult lives at a severe disadvantage. Education doesn't address their social disadvantages or their isolation and lack of connections and capital assets. Another means of extending prosperity, therefore, would be to make capital assets more accessible. For many years, the capital-asset elevator has been lifting America's wealthy to ever higher vistas without their moving a muscle (except, perhaps, to speed-dial their brokers). The 1990s bull market made the already rich fabulously richer. Despite periodic dips, the long-term outlook for capital assets is ever upward. So in addition to better schools, we should consider Bruce Ackerman and Anne Alstott's proposal for providing every young person in America with a financial "nest egg" of, say, $80,000, which could be invested in additional education, a home, a business venture, stocks and bonds, or some combination [see "$80,000 and a Dream," TAP, July 17, 2000]. These endowments would be financed by a small wealth tax on the very rich. This way all Americans could get on the capital-asset elevator. [See J. Larry Brown and Larry W. Beeferman, "From New Deal to New Opportunity," on page 24.]

Give caring attention to those who need it most. How can we ensure that children, the elderly, and the disabled receive the caring attention they need? We could take up where Progressive reformers left off a century ago when they created kindergartens. Given the demands that the new economy makes on families, it's time to extend public education downward to include three- and four-year-olds by offering them safe and stimulating preschool programs. And we can also extend the school day outward for all school-age children, with supervised play and study until most of their parents have finished work in the evening.

Businesses should offer parents flexible time in which to do their work and paid leave to take care of a young child or an elderly relative in need. Many firms already offer these amenities to their high-paid creative workers in order to better attract and retain them, but few such benefits are available further down the hierarchy. A society intent on giving caring attention to its young children would, in addition, acknowledge that parenting is not just a private role but also an important social responsibility. Any parent who decided to remain at home with a child under the age of three would be eligible for financial support equal to half the national median income. Such support could be provided via a refundable tax credit or a claim on unemployment insurance.

Reverse the sorting mechanism. The sorting mechanism is most pernicious when it comes to public schools, whose quality now largely depends on the incomes of the families living in the school district. Because families sort themselves by income into different townships and because most school funding comes from local property taxes, the children most at risk of failing in the new economy cannot afford the schools they need. A society intent on reaping the advantages of economic dynamism while minimizing its social injustices would shift school financing away from local property taxes. One option would be to replace local property taxes with a national education trust fund financed by a small tax on the net worth of all citizens.

We could break up high concentrations of poverty by giving housing assistance vouchers to all poor families, so they could live in more affluent communities. Preliminary evidence suggests that poor children of families who move to higher-income communities do better than the poor children who stay behind. In addition, we could require housing developers to include in their plans for upscale communities a certain proportion of lower-income residences. And we could bar private insurers from imposing higher-risk premiums on people because of where they live, what they earn, or their genetic makeup.

Seeking many other opportunities for various communities of race, income, and age to interact with one another is another way to reverse the social sorting mechanism. Such bridging could become an overarching goal of nonprofit community and faith-based organizations.

Proposals such as these are points of departure rather than a full agenda of reform. They are a sampling of what might be done--and fodder for debate about what should be done. They share a common idea: Rather than preserve and protect the old or go to the opposite extreme and let 'er rip, a decent society would ease the economic transitions and bring most of its people along, so that citizens' lives can be both materially better and socially saner. Although this path is not cheap, a dynamic economy can well afford the cost. And I believe that the cost is worth accepting for the sake of social and personal tranquility.

But rather than debating these larger trade-offs, we're stuck in three separate conversations. The first is a breathlessly enthusiastic one about the wonders of the new economy and the terrific deals it presents. To be sure, the dizzying exuberance of the new economy is justified--but the terrific deals alone don't justify the social price.

The second conversation is a fearful one about the dangers and depredations of unfettered capitalism, the power or greed of global corporations and international capital, and, sometimes, the encroachments of immigrants and ethnic minorities. But this fearful conversation confuses causes with consequences: The flows of capital and labor are responding to the widening range of choice open to consumers and investors around the world, the increasing ease by which all can switch to better deals, and the intensifying competition that results.

The third conversation is a private one about the difficulties of achieving a balanced life in this new era. As we work harder and sell ourselves more intensely, and as we adopt the market-directed, "Courage to Be Rich" ethos of our age, many of us are worried about what's becoming of our families, our friendships, our broader communities, and even our innermost selves. Yet we tend to view this unease in solely personal terms. To the extent that we feel we're failing in one domain or the other, we blame ourselves for being inadequate parents, spouses, workers, friends, or citizens. We thus overlook the larger forces that are making all such personal attempts to achieve better balance more difficult or complicated.

These three separate conversations are different responses to the same set of phenomena. Some of us might even be engaged in all three conversations simultaneously without seeing the connections between them. But if we are to deal effectively with the larger trade-off before us, we must understand those connections.

Now--especially now, at the start of a regressive administration in Washington and an economic slowdown--it is time for a larger discussion about what combination of economic dynamism and social tranquility we want for ourselves, our families, and our broader society. And it's time for a wider debate about the public choices we need to make in order to achieve this balance. This must not be an economic conversation exclusively. It is more fundamentally a moral one.

We are not passive recipients of the new economy, and we are not slaves to its technological trends. We should not misdirect blame for some of its less desirable consequences. As citizens we have the power to arrange the new economy to suit our needs and, in so doing, to determine the shape of our emerging civilization. Every society has the capacity to make such decisions. Making them is the very assertion of a society. Markets themselves cannot exist without such choices. Choices will be made, somehow; they cannot be avoided. The question is whether we make the most important of these choices together, in the open, or we grapple with them alone and in the dark. ¤

About the Author

Robert B. Reich, a co-founder of The American Prospect, is a Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. His website can be found here and his blog can be found here.